Re weakens on global funds concern; bond yields fall

Dec 28 | Updated: Dec 29 2007, 06:09am hrs
The rupee declined on concern global funds will slow investments in the region after neighboring Pakistans former prime minister Benazir Bhutto was assassinated on Thursday.

The currency declined for the first time in five days as the nations benchmark share index ended the longest gaining streak in two months. It also slipped as Asian stocks suffered the biggest loss in two weeks, stoking speculation investors are concerned about political turmoil in the region.

The rupee market was concerned about a possible negative reaction in stocks to the event, said Paresh Nayar, head of bonds and currency trading at Development Credit Bank Ltd in Mumbai. The currency weakened early in the day because of that.

The rupee declined to 39.4325 per dollar, from 39.4225 on Thursday, according to data compiled by Bloomberg. It fell as low as 39.4713 earlier. This is the currencys first loss since December 19.

The rupees 12.3% gain in 2007 is the biggest since at least 1974 and the best among Asian currencies after the Philippine peso. The median estimate of 23 strategists in a Bloomberg News survey is for the currency to rise to 39 by the end of March.

The Bombay Stock Exchanges Sensitive Index, or Sensex, fell 0.1%, its first decline since December 18. The MSCI Asia Pacific Index dropped 0.6% to 156.20, its steepest decline since December 17.

Ten-year bonds rose for a second day on speculation higher government spending will increase the amount of cash in the financial system, giving investors more funds to buy government debt.

Yields fell to the lowest in two months as ministries may boost expenditure to meet budget plans before the fiscal year ends March 31. Bonds also gained on optimism pension funds will increase purchases of the securities once they receive annual interest payments from a state-run deposit plan next week.

Bond market sentiment is improving as we approach the next quarter, said K Ramkumar, who manages the equivalent of $1.5 billion in debt at Sundaram BNP Paribas Asset Management Co in Mumbai. Government spending should rise, boosting cash in the system and cutting funding costs for bonds.

The yield on the 7.99% note due July 2017 fell 3 basis points to 7.81%, the lowest since October 29, according to the centra banks trading system. The price rose 0.17, or 17 paise per 100-rupee face amount, to 101.17. A basis point is 0.01 percentage point.

Bloomberg